The recent decision of Yogo Factory Franchising, Inc. v. Edmond Ying, et al., (US District Court D. New Jersey 2014), has been the subject of prior blog postings. We have discussed the court’s enforcement of the arbitration provision contained in the franchise agreement and the court’s re-affirmation that the New Jersey Consumer Fraud Act does not apply to the sale of franchises. Another noteworthy aspect of the court’s decision is the discussion of the heightened standard under New Jersey law to successfully assert a fraud claim.

In this case, the franchisee alleged that the franchisor made various misrepresentations during the sales process, including misrepresenting potential earnings, profits, the amount of start-up costs, and the type of support that the franchisor would provide.

Franchisee did not plead fraud claims with particularity

The court noted that when asserting fraud under New Jersey law, it must be pleaded with particularity. This is a heightened standard that requires the claimant to be very specific when alleging fraud, and does not permit general and broad claims. For example, when asserting fraud, a franchisee would not only need to assert the substance of the alleged misrepresentation, but also the date, time and place of the misrepresentation.

In this case, the court held that the franchisee’s fraud claims did not meet this standard. The franchisee did not specify which member of the franchisor made the misrepresentation and when. The court also noted that the franchisee claimed that the franchisor made material financial performance representations but did not specify exactly when and where they occurred. The court generally viewed the franchisee’s fraud claim as just asserting legal conclusions, leaving the franchisor to guess as to the ‘who, what, when, where and how of the events at issue”.

Franchisee’s allegations did not rise to level of fraud

Even if the franchisee had properly asserted its claim with particularity, the court concluded that it still failed to make a proper fraud claim. The court noted that the crux of the franchisee’s fraud claim was that the franchisor misrepresented the amount of money it would generate and the amount of support it would provide.

In rejecting the fraud claim, the court pointed out the following:

  • Two of the three franchise agreements contained an integration clause stating that the agreement constitutes the entire, full and complete agreement between the parties and the agreement supersedes all prior agreements;
  • The agreements contained a provision stating that no other representations induced the franchisee to execute the franchise agreement;
  • The franchise agreements clearly state that the investment and any success is speculative; and
  • The franchisee executed a disclosure questionnaire stating that the franchisor did not make any promise concerning revenue, profit or operating costs of the franchised locations, except as set forth in Item 19 of the Franchise Disclosure Document.

Based on these factors, the court did not see any basis for fraud. The court also concluded that under established New Jersey law, a party cannot maintain a fraud claim based on the other party’s failure to perform under a contract. The remedy is to bring a breach of contract claim – not a fraud claim.

This case underscores that if franchisors engage in some fairly common best practices (integration clauses, disclaimers to Item 19 financial performance representations, utilizing a disclosure questionnaire, etc.), they can reduce the likelihood of a franchisee maintaining a viable fraud claim under New Jersey law.